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In the winter of 2012 some 130 residents of Sunderland, a city in the north-east of England, died because they couldn’t afford to use their home heating. “With rising energy costs, ‘heat or eat’ is a reality that many vulnerable individuals in our society are now facing,” says Peter Walls, chief executive of Gentoo Group, which provides social housing for 28,000 low-income families in the area.

So that fewer people are forced to choose between either food or warmth, Gentoo installs solar panels at many of its properties. They generate free energy during the day, cutting a household’s energy bill by 40%.

However, putting a solar panel on every roof would require major investment, and as a result some households still shiver or go hungry. Enter Social Finance, a not-for-profit organisation that helps charities and social enterprises to raise new capital and make their revenue more sustainable.

After 25 years in banking with Dresdner Kleinwort, Social Finance’s chief executive, David Hutchinson, knows how to structure a clever financial opportunity. Such skills are sorely needed.

The social sector relies heavily on government grants, but the flow of funds has dried to a trickle in austerity Britain. Loans are also hard to come by. Commercial banks provide 82% of the £3.5bn (US$5.8bn) debt finance to the sector, but the recession has made them more cautious about whom they lend to.

The result is that many of the UK’s 900,000 social-sector organisations “live on thin air or credit on poor terms,” according to Mr Hutchison. Estimates of the funding gap they face range from £300m to £1bn a year. That stops them carrying out their work effectively.

A bit of creative financial thinking can make a big difference. In Sunderland, Social Finance persuaded an anonymous pension fund to back a deal between Gentoo and another social enterprise, Empower Community, which promotes low-carbon energy projects.

The pension fund loaned £10m to Empower, which used the money to buy and manage solar panels installed at 2,327 Gentoo homes and six offices. The big power companies are legally required to pay a 20-year subsidy for each panel. Gentoo will now use this influx of cash to buy new panels for 3,000 more homes. That cash-flow will give the pension fund a guaranteed, inflation-linked annual return.

The scheme benefits the local community too. Empower will use any profits to fund grass-roots projects. “The beauty of this deal is that everybody’s interests are aligned,” says Alex Grayson of Empower. Mr Hutchison adds that Social Finance wants to raise another £60m for solar schemes in the year ahead.

The Sunderland deal appealed to a pension fund because it offered a safe return. But Social Finance also creates Social Impact Bonds, where investors put their money at risk.

With an impact bond, the government commissions a social organisation to improve the delivery of a public service. The bond finances the necessary work; the government only pays up if performance targets are met. The first of these bonds, which Social Finance pioneered, was used to fund a programme that cut the reoffending rate among short-sentence male prisoners in Peterborough, a city in the east of England.

Social organisations need to make more use of this kind of risk finance if they are to bridge their funding gap, according to Big Society Capital, a social bank. Research suggests that most want to escape their dependence on secure lending and explore new funding ideas.

The potential is vast. According to research by Social Finance, 51% of pension funds are interested in socially responsible investment and 20% of investment managers are interested in products that have a positive social impact. Three-quarters of retail investors would like to put their money into a social fund rather than a traditional pension.

Rich individuals are particularly keen on seeing their money do social good, according to survey data. And this is a global trend. Over the next 40 years the current generation of baby boomers will leave their offspring around US$41trn, says a World Economic Forum report. “These [new] generations have grown up in a culture that calls on business to play a more active role in society,” it comments.

But that is all in the future. The problem today is that “the pool of socially motivated investment is still quite small,” according to Mr Hutchison. “The big challenge for all of us in the sector is to make it grow. We need to take social problems and orient them so they can plug into mainstream capital.”

That need not require clever financial engineering. “I find the more we talk about innovation, the greater the risk that a deal doesn’t happen,” says Mr Hutchison. “I like to keep it simple.” His philosophy helps to reassure organisations that need social funding, especially the smaller ones. The idea of giving an investor a financial stake in their future worries some. “They fear it might be sold to someone else,” explains Mr Hutchison.

And some in the sector are not ready. Social Finance applies a “pragmatic over-ride” on the organisations and projects it tries to help. “We need to see that there’s a route to raising finance. So we filter the challenges we take by applying a healthy realism about what’s possible.”

In many ways, that challenge is the same today as it was when Mr Hutchison left the riches of investment banking for the charity life five years ago. The sector needs a relationship with the world of finance, and relationships work best when each party understands and respects what the other is trying to achieve—whether it’s raising finance for a cross-border acquisition or helping vulnerable families to stay warm.

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